November 5, 2012 11:11 pm

D. Börse faces €100-€150m capital shortfall

Deutsche Börse needs around €100m-€150m in additional capital for Eurex, its clearing house, to meet incoming requirements from European regulators as it prepares for the implementation of wide-ranging reforms of derivatives markets.

The shortfall, announced to analysts on a conference call last week, comes as the German exchange prepares to formally launch off-exchange derivatives clearing on Eurex on November 13.


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The group will make up the shortfall with cash from existing operations. It is also planning to expand its OTC clearing service next year beyond clearing interest rate swaps into currencies, such as Japanese yen swaps, and introduce services that will allow users to post less collateral.

It also announced on Monday it would also begin Europe’s first clearing service for the securities lending market.

Deutsche Börse’s focus on over-the-counter (OTC) clearing and collateral management comes as it refocuses its strategy and seeks to offset languishing volumes on markets, which have hit earnings. Plans to grow in derivatives by merging with NYSE Euronext were blocked by European regulators earlier this year. At the same time, it has been hit by rising operating costs and falling trading volumes, illustrated by successive quarterly results this year.

In response, Deutsche Börse is looking to exploit opportunities thrown up by incoming global regulation intended to strengthen the financial system. Regulators in G20 countries want more trades in the over-the-counter derivatives market to be backed by collateral and processed through clearing houses, to act as insurance that trades are completed in the event of a default.

The group wants to expand the operations of Eurex, its derivatives trading and clearing business, and Clearstream, its settlement and securities custody arm. The two units collectively generate three-quarters of total operating income for the group, compared with 30 per cent a decade ago.

However, tough new European regulatory capital rules appear to have caught the industry unaware. Eurex is the second major clearing house to admit to a shortfall after LCH.Clearnet, the Anglo-French group, said it would need to increase regulatory capital by an estimated extra €300m-€375m last month.

Deutsche Börse’s OTC interest rate swap business, which pitches it in competition with LCH.Clearnet and CME Clearing Europe, will be launched on November 13.

It will also introduce a service for so-called buy side investors, such as hedge funds and institutional investors, that will convert securities into cash to fulfil variation margin.

The seven banks supporting the service – Barclays, BNP Paribas, Citibank, Credit Suisse, Deutsche Bank, JPMorgan and Morgan Stanley – have been testing the system in recent months. Potential users have been asking questions about the legal background to the exchange’s client asset protection service ahead of the regulatory clearing mandate in 2013, Deutsche Börse said in a circular to customers last week.

Eurex will be the largest clearing house in Europe to be based outside of the UK. New European market entrants, such as IntercontinentalExchange and CME Clearing, have cited UK bankruptcy law as one of the key factors behind their decisions to base themselves in London.

The clearing service for securities lending will begin on November 22 with German and Swiss blue-chip equities and exchange traded funds. Loans in equities, fixed income products like European government bonds, and more ETFs are planned.

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